OPINION October 2, 2017

Ukraine Can Boost Annual Output by US$15 Billion with Land Reform

Land reform—lifting the moratorium on agriculture land sales—is the most powerful measure the government can take to boost economic growth and job creation, particularly in rural areas. More than 70 percent—some 43 million hectares—of Ukrainian territory is classified as agricultural land. And that land is exceptionally fertile: Ukraine has one-third of the world’s black soil. But despite this abundance, agricultural yields in the country are only a fraction of those in other European countries whose land is not of the same quality. This is because land users have little incentive to invest in land management, as neither land owners nor users know if, when, or how the moratorium will be lifted. Moreover, getting credit is difficult and costly as land cannot be used as collateral.

Meaningful reform of the land sector must include providing incentives for long-term investment and proper land management, access to credit, and transfer of land to its most productive uses. The resulting boost to agricultural productivity could add US$15 billion to annual output and increase annual GDP by about 1.5 percentage points. And it would boost public revenue—up to US$2 billion from the one-time sale of state land and US$250 million annually from land leases—freeing precious budget space for schools, hospitals and infrastructure.  

It would also allow land owners to get a fair return on their most valuable asset. Today, rental prices for agricultural land in Ukraine are a fraction of their market value. Indeed, some 4.5 million small land owners, often retirees, currently receive 10-20 percent of annual income from renting out their land at rates about a tenth of the level in EU countries, and well below developing countries like Argentina and Brazil. This is unfair to landowners and is strangling the livelihoods and future prospects of the country’s rural population.

The economic case for lifting the moratorium is clear. But unless this is done transparently, the risks may outweigh the benefits. In a country that has seen enormous public wealth disappear through corruption and theft, and with public institutions charged with the prevention of this kind of malfeasance yet to demonstrate their effectiveness, many fear that any change to the current system will lead to concentration of land in the hands of the elite. Thus, beyond the economic reforms/measures listed above, fair and transparent reform of Ukraine’s land market would demonstrate to Ukrainians—and the world—that the country can ensure that its unique natural resources can benefit all of its citizens.

The good news is that such an outcome is possible if the government follows through on actions it is taking on several fronts.

First, making land markets transparent: Building public trust in agricultural land markets will require information from registry and cadastre to be integrated and accurate. Prices—at least at the aggregate level—for land rental and sales should be public. And transactions need to be transparent. Measures, such as the use of e-services in the Cadaster and mandatory e-auctions for rental of state land, should be extended to sales.

Second, informing land owners of their rights: To use their land most effectively, land owners need to be aware of their rights. One way to achieve this, that has broad support, would be to upgrade the technical and operational capacity of the Parliamentary Ombudsman for Human Rights with the establishment of a Land Ombudsman. That would help provide land owners unbiased legal advice on questions regarding their land rights, and help access the judicial system and get redress if these rights are violated.

Third, facilitating access to finance for farmers: Nearly two decades ago the Peruvian economist Hernando de Soto published The Mystery of Capital, in which he identified the link between property rights and economic development. His simple but groundbreaking observation was that worldwide, trillions of dollars of “dead capital” were frozen because poor people did not enjoy the full ownership of their land, including the ability to leverage its value to borrow capital. In Ukraine, the moratorium on land sales has prevented land owners from using their most valuable asset as collateral, making it impossible to access credit to expand production or start a new business. With an appropriate regulatory environment, transparent land sales markets would facilitate much-needed rural investment and enable banks to extend credit to family farmers and rural SMEs. Work on instruments to fast-track development of rural financial markets is already progressing, including working with farmers’ associations to train farmers with no history of credit or record keeping on how to put together viable business proposals.

Land reform will be challenging, but the rewards to rural Ukraine, and ultimately to the entire country, promise to be transformative. Moreover, given Ukraine’s potential as a commodities exporter, reform of the sector would impact food security globally. Fortunately, the Government has taken important first steps in the right direction. It has made land reform a priority and begun critical preparatory measures discussed above. So, for the sake of the Ukrainian people and the country's economic prospects, I hope the authorities and politicians have the vision and courage to lift the moratorium this year, so that Ukraine’s potential will finally be tapped.